August 2018

Pan European property shares initially continued their positive run with the benchmark FTSE EPRA/NAREIT Developed Europe Index TR in GBP) gaining over 2.5% in the first 3 weeks of August. However there was an abrupt pullback in the last few days of the month, coinciding with the end of the holiday period. This resulted in a monthly return of 0.87% whilst the NAV total return slightly exceeded this returning 1.22%.

Once again the UK was a weak performer (-2%) but not the weakest which was the Netherlands. The Dutch cohort of stocks are mostly retail owners dominated by Unibail-Rodamco-Westfield (-4.7%) and Eurocommercial (-8.2%). Both companies announced lacklustre results. Unibail has been on the proverbially podium for high quality disclosure for many years but struggled to provide updated forecasts post the Westfield transaction. Eurocommercial’s figures didn’t appear to warrant such a drastic share price move but investors were disappointed by the lack of succession planning from the 73 year old CEO and the loss of another key executive. Retail stocks across the region all performed dismally with Hammerson (-7.6%), Intu (-9.5%) in the UK, IGD (-9.4%) in Italy, Mercialys (-4.1%) and Klepierre (-4.2%) in France all reflecting investor concerns surrounding the longterm demand for retail space.

Geographically Germany was the strongest region dominated again by the residential businesses which performed well as Bund yields tightened amidst a ‘risk off’ response to the weakness across many emerging markets. Germany also became the largest country in the benchmark in the month (over 27%) exceeding the UK (26%). We expect the gap to widen further as the German economy powers ahead as the UK stutters in the face of Brexit related uncertainty. Alstria Office (-2%) continues to be the underperformer amongst the office businesses suffering from low leverage and a poor cost ratio.

Technopolis (+20.5%), a small Finnish business space owner received a recommended bid at a 14% premium to the undisturbed price from a private equity group. The exit price equates to the H1 18 EPRA NAV of €4.65 and reminds all investors that undervaluation by the public markets will result in more companies being taken private. Elsewhere in Scandinavia, performance was also strong particularly in Sweden where the Riksbank continues to exhibit dovish behaviour providing succour to the many property companies with short term, floating debt. This combined with strong market conditions in office, logistics and residential rental markets has resulted in excellent share price performance so far in 2018 which broadly continued in August. However we remain vigilant given the higher levels of leverage amongst these companies than elsewhere in the European listed property arena.

Logistics remains the asset class ‘du jour’ and investors continue to pay healthy premiums versus current asset values. This is entirely understandable given rental growth expectations and we remain resolutely overweight the sector. However the sheer weight of demand is neatly exhibited by EuroBox, a €300m cash box IPO in July where the shares are trading at a 6% premium to cash. Once the proceeds are invested (they are in exclusive discussions) and adjusting for acquisition costs the premium will rise to double digits.

Gearing in the fund reduced in July as we received the proceeds of the sale of Hispania to Blackstone and we have yet to redeploy the proceeds preferring to see the direction of investor sentiment post the summer period. This is particularly the case in the UK where political uncertainty has rarely been greater.